Bloomberg News

China’s Cash-Poor Developers Fuel Commercial Property Deals

This photo taken from the Jin Mao Tower in the financial district of Pudong shows a view of the Shanghai skyline along the Huangpu River. Photographer: Peter Parks/AFP/Getty Images

Shanghai and Beijing, the two cities
with Asia’s fastest-growing office rents, are set to lead a
surge in commercial property transactions in China as more
developers sell assets to raise cash for housing projects.

Sales of office and retail buildings in the two major
Chinese cities will double this year to $10.4 billion, according
to Cushman & Wakefield Inc., which doesn’t make nationwide
projections. The number of deals being negotiated in Shanghai in
the past six months rose 50 percent from a year earlier, Jones
Lang LaSalle Inc. said.

Chinese real estate companies are selling commercial
buildings for funds to complete apartment projects after the
government’s two-year effort to curb home prices tightened
credit. The cash ratio, a measure of liquidity for developers,
fell to the lowest since 2008 as of December, according to data
on 146 listed builders in China and Hong Kong compiled by
Bloomberg.

“Many Chinese developers today are more willing to sell
their office buildings or retail space because they need to
access capital for their residential projects,” said Jack Ye,
Shanghai-based national director of investment at Cushman, the
world’s biggest closely held property service company.

Builders are opting to sell commercial developments because
offering residential projects is difficult amid the curbs, Ye
said. The government has imposed limits on how many apartments
can be owned, as well as increased mortgage and down-payment
requirements.

Falling Home Sales

China’s home sales fell 18 percent from January to March,
the first quarterly drop since the government changed its
methodology for property data in February 2011. Home prices in
April fell 0.3 percent from March to a 14-month low, SouFun
Holdings Ltd., the nation’s biggest real estate website owner,
said today.

Greentown China Holdings Ltd. (3900) said on April 17 it will sell
a Shanghai project including loans for 2.1 billion yuan ($333
million) to Soho China Ltd. (410) to improve its cash flow.
CapitaMalls Asia Ltd., the retail property unit of Southeast
Asia’s largest developer, bought a 39,500 square-meter (425,174
square-foot) commercial site in Beijing from a subsidiary of
Poly Real Estate Group Co., the Guangzhou, southern China-based
developer whose first-quarter net income fell 24 percent.

Profit margins and cash flow at smaller local and regional
developers have been hurt by government efforts to cool down the
housing market, Matt Jamieson, an analyst at Fitch Ratings Ltd.,
wrote in a note on April 17. The government restricted the
number of homes each family is allowed to buy.

Soho’s Acquisitions

Soho, the biggest developer in Beijing’s central business
district, plans 10 billion yuan of acquisitions this year,
Chairman Pan Shiyi said in Hong Kong on March 14.

Developers are struggling to complete housing projects as
prices extend declines. Home prices fell in a record 37 of 70
cities from a year ago tracked by the government in March as
officials pledged to keep restrictions on property purchases
that have sapped buyer demand.

Hangzhou Glory Real Estate Co., a developer based in
Hangzhou in Zhejiang province, filed for bankruptcy on March 30,
becoming the first developer to file for insolvency in the
eastern Chinese province.

Beijing and Shanghai had the fastest office rental growth
in 2011 in the Asia-Pacific region, according to New York-based
Cushman. Beijing’s prime office rents climbed 75 percent to
become Asia’s third-costliest office market after Hong Kong and
Tokyo, while those in Shanghai jumped 24 percent.

‘Losing Future Income’

“Selling their profitable commercial properties is easier
as it’s only a matter of losing future income if rents continue
to rise,” Ye said.

Greentown, the biggest builder in Zhejiang province, has
raised 3.73 billion yuan through five transactions since
December, Chief Financial Officer Simon Fung said on Feb. 9.

The developer’s long-term credit rating was cut to CCC+ on
April 26 by Standard & Poor’s, which cited “heightened risk for
refinancing and debt repayments.” Greentown has the second-
lowest Altman’s Z-score among 25 Chinese property firms listed
in Hong Kong, a measure that tracks the probability of companies
entering bankruptcy within the next two years, based on data
compiled by Bloomberg.

Property companies listed in China and Hong Kong face worse
cash shortages this year than in 2008, according to a survey of
131 companies by CEBM Group Ltd., a Shanghai-based investment
advisory firm. In 2008, China’s home prices and sales fell for
the first time since the government started encouraging private-
home ownership in 1998, as credit froze in the wake of Lehman
Brothers Holdings Inc.’s collapse.

Buying Low

Foreign funds and cash-rich Chinese developers are looking
for opportunities to “buy low,” said Alan Li, Shanghai-based
head of investment at Jones Lang, the world’s second-biggest
publicly traded commercial-property broker. Some of the deals
under negotiation may be closed in two months, he said.

Property prices, including residential and commercial,
climbed 7.5 percent in 2010 as China encouraged a lending spree
to cushion the economy with a record 9.6 trillion yuan of loans
issued in 2009.

“It’s a delayed reaction to the financial crisis that
started post-Lehman in 2008,” said Joel Rothstein, a Beijing-
based real estate and structured finance partner at Paul
Hastings LLP, a U.S. law firm.

Inquiries from prospective clients considering the purchase
of properties have increased about 20 percent to 30 percent in
the past three months from a year earlier, he estimated.

Percolating Actions

“There have definitely been actions percolating much more
than for quite some time,” he said. “People have gotten far
enough to the point that they are actually approaching law firms
to conduct initial due diligence or advise on deal structuring
or term sheets.”

Developers that plan to sell assets are reluctant to cut
prices as they bet the government will ease curbs and commercial
rents will rise, Cushman’s Ye said. Prices of commercial
properties in Beijing and Shanghai have fallen about 2 percent
to 5 percent this year, said Li at Jones Lang, based in Chicago.

“We expect to see some more of these transactions for
smaller and liquidity-weaker players in the market,” said
Vanessa Chan, an analyst at Fitch in Hong Kong, who expects the
government to maintain its property policy this year.
“Developers will keep their refinancing options open.”

Potential buyers say they don’t expect a fire sale even as
developers rush to sell their commercial buildings.

“Certainly we are active in China now, but good assets
will not be sold at distressed prices,” Ng Beng Tiong, chief
executive officer of the private funds group at ARA Asset
Management Ltd. (ARA), a fund management unit of Hong Kong billionaire
Li Ka-Shing’s Cheung Kong (Holdings) Ltd., said in an interview
in Beijing. “You might get something with a fair value at a
slight discount in the current market.”

To contact Bloomberg News staff for this story:
Bonnie Cao in Shanghai at
bcao4@bloomberg.net

To contact the editor responsible for this story:
Andreea Papuc at
apapuc1@bloomberg.net